Dynasty Trust: What is it, and Do You Really Need One?

Dynasty Trust: What is it, and Do You Really Need One?

Many of us have seen the commercials touting the benefits of setting up a dynasty trust: “Let your fortune go on for generations to come, protect your kids from divorce, and protect your kids from creditors.” It sounds compelling, but what is a dynasty trust, and do you really need or even want to set one up?

First of all, a dynasty trust is primarily intended to protect for more than one generation the assets you leave behind after death. As part of this strategy, it serves to reduce the total estate and other wealth-transfer taxes over several generations rather than just one. 

For instance, estates over $5.34 million are currently subject to estate taxes. If you leave $10.34 million to your child without any type of trust, $5 million is subject to estate tax. Then, if that child invests the money and it grows again, let’s say to $10.34 million, taxes are again owed on $5 million upon your child’s death if your child leaves that money to your grandchild. With a dynasty trust, an estate tax is owed just once, when you transfer the assets into the trust. No estate tax is due upon the transfer to your grandchild.

That’s the good news, if you have an estate of such size, which most people do not. The bad news is that it is of course far more complicated than that. The size of estates subject to tax has changed several times recently; who’s to say what will happen through the years? A dynasty trust is irrevocable and the terms cannot be altered. Also, income taxes are due on income (e.g. interest) produced by the assets. 

Furthermore, if the point of this kind of a trust is to give you control beyond the grave, who are you going to appoint to manage it? Not your kids probably, because the point is to take control away from them. This means that a bank or trust company will be managing the trust for many years (and possibly generations), at very substantial cost. With this other entity controlling the money, your kids may even grow to resent it, because you only “sort of” left it to them. There is something to be said for giving grown adults the freedom to make their own bad choices.

These and other intricacies mean that you really need to know what you are doing and know what will be best for your heirs for generations. —Or perhaps question whether guessing about what is best for those future generations is really a worthwhile endeavor in the first place. 

You can stop in and speak with your friendly local CDP staff to help you find information on estate planning documents. You can also see Nolo’s website for a wealth of information and articles on these subjects, such as: tying-up-the-family-fortune-forever.html.

brook
brook@cadocpreparers.com